How to Evaluate a Startup Equity Offer (Without Getting Burned)

You got an offer. There are stock options in it — probably described as something like "50,000 options vesting over four years with a one-year cliff."

Does that sound like a lot? A little? How would you know?

Most people don't evaluate their equity properly before signing. They either take the number at face value, google for 30 minutes without a clear framework, or ask a friend who's equally confused. Then they join the company and spend years wondering whether those options are worth anything.

Here's a framework that actually works.

Step 1: Get the numbers that matter

Before you can evaluate equity, you need four pieces of information. Ask for all of them before you sign.

1. How many options are you being granted?

This is the number in your offer letter. It's meaningless on its own — but it's your starting point.

2. What's the total number of shares outstanding (fully diluted)?

"Fully diluted" means all shares that exist or could exist: founder shares, employee shares, all issued options, and all reserved-but-unissued options. This is the denominator in your ownership percentage calculation.

If the company won't tell you this number, that's a yellow flag. It's standard to share it with employees receiving equity.

3. What's the current 409A valuation (the "fair market value")?

The 409A is the IRS-approved independent valuation of common stock. This is your exercise price (the price you pay when you buy the shares). It's different from the preferred share price investors paid.

4. What was the price per share in the last funding round (preferred)?

This tells you what investors paid and implies a valuation. The ratio between preferred and common (the "discount") tells you how much the market expects the company to grow for your common stock to be worth what investors paid for preferred.

Step 2: Calculate your ownership percentage

Divide your options by the fully diluted share count.

Ownership % = Your options ÷ Fully diluted shares

Example: 50,000 options ÷ 10,000,000 fully diluted shares = 0.5%

That 0.5% is your actual ownership stake — assuming no further dilution (more on that in a moment).

Don't let anyone frame this as "50,000 shares!" — the raw number is meaningless without context. Ask about it in percentage terms.

Step 3: Model the outcomes

Now run three scenarios: a bad exit, a good exit, and a great exit. This is the only honest way to understand what your equity is worth.

The formula:

Your payout = (Exit valuation × Your ownership %) − (Exercise price × Your options)

The second part is what you pay to buy your shares when you exercise. Don't ignore it.

Example:

• 50,000 options at a 409A exercise price of $1.00/share
• 0.5% ownership in the company

| Scenario | Exit valuation | Your ownership value | Cost to exercise | Net payout |

|----------|---------------|---------------------|-----------------|------------|

| Modest exit | $50M | $250,000 | $50,000 | $200,000 |

| Strong exit | $200M | $1,000,000 | $50,000 | $950,000 |

| Unicorn exit | $1B | $5,000,000 | $50,000 | $4,950,000 |

Then reality-check those exit valuations: Is a $50M exit realistic? A $200M exit? A $1B exit? Ask yourself what the company would need to accomplish. Research what comparable companies have exited at.

One useful tool: Equity Decoder's free equity calculator — build these scenarios in minutes.

Step 4: Apply the dilution discount

Your ownership percentage will go down over time. Every time the company raises another funding round, it issues new shares — and your stake shrinks unless you can buy in. This is called dilution.

A rough rule of thumb: assume 20–30% dilution per funding round. If the company raises two more rounds before exit, your 0.5% could be 0.25–0.35% by the time you see any money.

Build dilution into your models. The unicorn scenario looks different when your 0.5% has become 0.3%.

Step 5: Check the liquidation preferences

This is where most equity evaluations break down. Investors almost always hold preferred stock with liquidation preferences — meaning they get paid back first in an exit.

A 1x non-participating liquidation preference means: investors get their money back before anyone else sees a cent. If investors put in $50M and the company exits for $60M, the first $50M goes to investors. Employees split the remaining $10M.

If investors have 2x preferences, they get twice their investment back before employees see anything.

A small exit in a heavily-funded company can leave employees with nothing even if they hold options. Check the cap table structure if you can get it — or at minimum, ask: "What are the liquidation preferences for preferred shareholders?"

Step 6: Understand your vesting schedule

Options vest over time, which means you earn them gradually. Standard is four years with a one-year cliff.

The cliff means: if you leave before your one-year anniversary, you get nothing. After one year, you've vested 25%. After that, a small amount vests each month (typically 1/48th of the total grant).

What to look for beyond the standard:

• Single trigger vs. double trigger acceleration. If the company is acquired, does your unvested equity vest immediately (single trigger), or only if you're also let go (double trigger)? Double trigger is common and means an acquirer can hold your unvested equity hostage to keep you.
• Post-termination exercise window. How long do you have to buy your vested options after leaving? Standard used to be 90 days; companies like Stripe have extended this to 10 years. A short window can force you to either pay a lot to exercise (and take the tax hit) or forfeit options you earned.

Step 7: Know your option type (ISO vs NSO)

The tax treatment differs significantly.

Incentive Stock Options (ISOs):

• No tax when you exercise (usually)
• Capital gains tax when you sell, if you hold shares for 2 years after grant and 1 year after exercise
• But: exercise can trigger Alternative Minimum Tax (AMT) — a real risk for large grants

Non-qualified Stock Options (NSOs):

• Taxed as ordinary income at exercise — the spread between exercise price and fair market value is income
• Also taxed at capital gains when you eventually sell

The AMT risk on ISOs can be significant. If you're considering exercising a large ISO grant early (to start the holding period clock), model the AMT impact first. Equity Decoder's chapter on AMT covers this in detail.

The questions to ask before you sign

Take this list into your negotiation:

1. What's the fully diluted share count?
2. What's the current 409A valuation (strike price)?
3. What was the price per share in the last round, and what does that imply for the company's valuation?
4. What are the liquidation preferences for preferred shareholders?
5. What's the post-termination exercise window?
6. Is acceleration single-trigger or double-trigger on acquisition?
7. Are these ISOs or NSOs?

A company that can't answer these questions — or won't — is telling you something.

What you're really evaluating

Equity compensation is a bet. You're betting that:

• The company grows significantly
• There's an exit (IPO or acquisition) that generates liquidity
• The cap table structure gives common shareholders real proceeds
• You stay long enough to vest
• You can afford to exercise if and when the time comes

None of those are guaranteed. But you can make an informed decision by understanding what you're actually getting — not just a number on a page.

Equity Decoder covers all of this in 12 chapters with worked examples, a free Google Sheets calculator, and plain English explanations. Start with Chapter 1 free →